Hi Diver Dan, with respect it was not my reasoning; I was quoting Warren Buffet. His second paragraph made me immediately think of the Perth couple I quoted.
The surge in housing prices began with women's lib, and the 2 breadwinner family, coupled with a relaxation of banking regulation. Earlier, bank mortgages were restricted to no more than 25% of one partner's income, as I recall; now of course a mortgage can be 100% of one partner's income; bargaining power which has of course sent housing (and land) prices to ridiculous heights.
Lower interest rates do not increase the (M3) money supply. Interest itself increases M3 money, so the more interest the more (future financed) money. I don't believe my solution would increase M1 (cash) either, as it is a replacement scheme for (government granted) loan deposits, which would force first homeowners to save more.
Unlike fractional reserve banks which simply roll over loan repayments into more loans, governments must ("should" "are supposed to") set a budget and allocate initial funding and show where loan repayments are going to be used. IOW, the loan repayments could actually extinguish the loan. Budgeted amounts of loans available means supply could be allocated to predicted demand, instead of simply creating demand and forcing unsustainable growth.
The reason my idea will never be adopted, is because speculators (which include all baby boomers such as myself with real estate to sell) would take -an initial- dump, with a stabilised housing market; although relative pricing would still be the same, at a lower level.
IOW, it would be harder to finance retirement with real estate.
Apart from these points, I am largely in agreement with the posters so far.

*House prices plummeted leaving the asset value of the property a worth below the borrowed capital: A situation which forced home owners to walk away from their homes, (The midnight flit) and abandon the loan obligations.*

Sheesh Diver Dan, there was silly old me thinking that people bought
houses above all to live in. If the value of the house decreases,
it still can be lived in.

Jingle mail did not force home owners, they simply grabbed their
chance when they saw it, to slither out of a debt which they had
previously agreed to.

In America, unlike in Australia, if sale value of the home does not
cover the mortgage, that its bad luck for the mortgage provider.
In Australia, borrowers can sensibly be persued for other assets.

Sounds to me like this could well be another political stuff up
by a well meaning US Congress. Having good intentions is seemingly
not enough to produce sensible laws. The law of unintended
consequences invariably strikes.

The lending on homes in the US together with the near fraudulent
selling of sliced up mortgages was a bomb waiting for the slightest
disturbance to set it off.

That came with the climbing oil prices in 2007.
Ethanol production increased significantly which diverted grain from
food to fuel. The price of food increased from that cause as well as
food production fuel costs and fertiliser costs.

The result was many Americans had a choice forced onto them.
Buy petrol to go to work or buy food or pay the mortgage.
We all know what they did.

Fuel reached $147 a barrel in July 2008 and the economy collapsed.
Then they discovered no one was sure who really held the mortgages.
So often houses sold under foreclosure have uncertain title.

One big mess and it holds the hand grenade of the next crash.

…Government timidity in the face of formidable market forces is the rule in direction as the housing crisis worsens, exacerbated by a string of national disasters. I try not to join the boring throng of wingers criticising the ineptitude of the Gillard Government, but it is hard to ignore its stupidity and lack of focus on the real issues facing day to day life in the electorates.

… Like the Pirates of Penzance, skipping inanely on the world stage while an additional fifty four thousand of her subjects beg for housing following the Queensland floods, and navy ships slowly sink at anchor from old age, unable to assist in time of national emergency.

…But thankfully Pauline Hanson has offered herself again as a target and will no doubt inadvertently inject some good policies through Abbots Liberals as before: Hopefully she may consider offering policy direction to the housing crisis, are you listening Pauline?

Yabby:

...BAZZ does a sensible job (below your post) at explaining the circumstances which were some of the direct causes of home defaults in the US.

...Not all defaulters did the moonlight flit either. Many defaulters stood their ground honourable against panic attempts by banks to evict them in order to resell their properties; but alas the market evaporated: Crashed… which is a prediction for our market here in Australia, from many in the know (of which I am not one of them)! I believe, from my reading on the subject, a significant decline in property values in some areas is already in evidence.

The Australian housing bubble keeps inflating. Why are so many people overpaying for run down homes in Australia when housing is so much cheaper everywhere else in the world. We have the most expensive house prices on the planet. Many people feel by the time they retire they still won't be able to afford a house! But it can't and won't keep rising at this rate. To read the comments on AustralianPropertyForum.com you'd think the bubble was about to burst, and maybe it is, but how long must we wait? I can't imagine the POP is far away, and when it comes there will be a lot of speculators screaming for more government intervention. My fear, is that the government WILL listen to them!

Matt Cooper
Australian Property Forum
http://australianpropertyforum.com